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As our newspapers suffer through declining revenues and readership, threatening not only their profits but their very existence, we may well ask: must good journalism be profitable? In fact, does journalism even require a profit motive?

Not necessarily.

The not-for-profit route beckons. The Internal Revenue Service has demonstrated for decades that it’s prepared to grant tax-exempt status to organizations that generate and disseminate information, provided they have substantial financial support from the general public. The tax exemption helps generate that support, enabling the organizations to seek tax-deductible donations and foundation grants.

Leading the parade, in the years after World War II, were public broadcasting stations, which over many years consistently have produced some of the finest stories available to the American public, from daily breaking news to historical documentaries.

But the I.R.S. also has bestowed its tax-exempt blessing on more traditional,
news-only organizations that primarily produce investigative or interpretive journalism. They just don’t publish newspapers.

The Center for Investigative Reporting, Inc., founded in 1977 in Berkeley, California, declares on its Web site that its mission “is to produce and distribute multimedia reporting that reveals injustice and abuse of power, has an impact, and is relevant to people’s lives.” It has won numerous journalism awards, including the George Polk Award, Emmy Award, Society of Professional Journalists’ Sigma Delta Chi Award, and Investigative Reporters and Editors Award.

Among the C.I.R.’s major backers are the Carnegie Corporation of New York, the William and Flora Hewlett Foundation, the John S. and James L. Knight Foundation, the McCormick Tribune Foundation, the Park Foundation and the Rockefeller Brothers Fund. Such major contributors provide the bulk of the organization’s revenue, which was $2.6 million in 2008; 46 percent was “public support.”

The Center for Public Integrity, in Washington, D.C., was recognized by the I.R.S in 1990 as a tax-exempt organization. Its mission, according to its Web site, is “to produce original investigative journalism about significant public issues to make institutional power more transparent and accountable.”

In cooperation with the Fund for Independence in Journalism, the C.P.I. reported in January 2008 that “President Bush and seven of his top officials made at least 935 false statements in the two years following 9/11 about the national security threat posed by Saddam Hussein’s Iraq.” Other C.P.I. stories questioned the credentials of Bush judicial appointees.

In 2009 the C.P.I. found, through computer analysis of nearly 7.2 million high-interest or subprime mortgage loans, that “at least 21 of the top 25 subprime lenders were financed by banks that received bailout money,” a report picked up by the Los Angeles Times, the Washington Post, USA Today and a number of other papers. In March 2010 the C.P.I. published an analysis of lobbying expenditures related to health care reform legislation, concluding that “about 1,750 businesses and organizations hired about 4,525 lobbyists, total–eight for each member of Congress–and spent at least $1.2 billion.”

Pro Publica, Inc., based in New York, joined the ranks of tax-exempt investigative news organizations with a national scope in 2008. It’s headed by former Wall Street Journal managing editor Paul Steiger and former New York Times investigative editor Stephen Engelberg, staffed by about 30 seasoned journalists. It came briskly to life with a stunning three-year pledge of $30 million from Herbert and Marion Sandler, founders of Golden West Financial Corporation, a savings-and-loan holding company that they sold to Wachovia Corporation in 2008 for about $24 billion.

In its application for 501(c)(3) status, Pro Publica stated it would focus its considerable resources on “truly important stories, stories with ‘moral force.’ We will do this by producing journalism that shines a light on exploitation of the weak by the strong and on the failures of those with power to vindicate the trust placed in them.”
ProPublica’s stories are published in The New York Times, the Chicago Tribune and other newspapers. Sometimes the paper’s reporters collaborate in the reporting and writing.

Another well-financed, tax-exempt national organization, the American Independent (founded in 2006 by former journalist and entrepreneur David S. Bennahum as the Center for Independent Media), in Washington, D.C., operates a “new journalist” training program. It “provides the skills and mentorship to bloggers and online journalists, state by state, with the aim of creating a robust corps of individuals who can systematically report on issues critical to these communities, while adhering to the highest standards of professional journalism.”

The organization also supports its trainees in the establishment of state news operations, first in Colorado and Minnesota, then in Iowa, Michigan and New Mexico. In addition the American Independent operates a national news bureau in Washington, D.C. In their short existence these organizations have won awards from the Society of Professional Journalists, the McCormick Foundation Specialized Reporting Institute on Financial Crime, the National Press Club, the Online News Association, and various local organizations. The American Independent is more successful than other national journalism not-for-profits in attracting public support, which was 58 percent of its $4.1 total revenue in 2008.

In a future post we’ll look at not-for-profit news organizations with a state or local focus that have obtained tax-exempt status from the I.R.S.

To prevent its demise. To strengthen the journalism profession. To fortify the community. To obtain a tax deduction. To stanch the bleeding.

Harold Poynter donated his St. Petersburg Times stock to a new foundation for journalism research and education. George McLean gave the Northeast Mississippi Daily Journal, in Tupelo, to a community- development foundation. H. Brandt Ayers, publisher of the Anniston Star in Alabama, and family members agreed to will their stock to a nonprofit institute that operates, at the Star, the newsroom part of a university’s graduate journalism program.

The tax benefits are attractive, especially as newspaper profits diminish. A charitable bequest is exempt from federal estate tax. A gift by a living donor is deductible, up to 50 percent of adjusted gross income. A corporation may deduct gifts up to 10 percent of taxable income. Moreover, individuals who donate their stock may still run the paper and draw salaries–subject, of course, to the board of directors of the tax-exempt organization. They just can’t profit from any appreciation in the value of the enterprise, and they cannot pass it on to their heirs, who, these days, might see the receipt of a newspaper as a mixed blessing anyway.

When it comes to corporate ownership of a money-losing newspaper, giving the paper away not only creates a tax deduction (probably based on the value of the assets, when there’s no profit to use in calculating value), it stops a continuing drain on the company’s bottom line. Hearst Corporation and its shareholders would have been better off if the company had donated the unprofitable Seattle Post-Intelligencer to a community foundation rather than just killing off the print edition (firing most of the very capable staff) and continuing to subsidize a slimmed-down, Internet-only publication.

The community, too, might have benefitted if a not-for-profit P-I had been able to solicit sufficient community financial support to continue publishing; it never got that chance.

By Joe Mathewson
If a newspaper becomes not-for-profit and obtains an Internal Revenue Service tax exemption enabling it to solicit tax-deductible contributions and grants, perhaps extending the paper’s life, what’s the downside? That question raises two others.
1. May a not-for-profit newspaper still endorse political candidates? The answer is clear: no. Section 501(c)(3) of the Internal Revenue Code says a tax-exempt organization “does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” This would be a distinct loss for most newspapers. However, it’s equally clear from tax exemptions the I.R.S. has granted to advocacy organizations over many years that an exempt entity is still free to take positions on public issues or policies.
2. Will advertising revenue be taxed as “unrelated business income” under the Internal Revenue Code? Maybe not. The statute defines an unrelated business as “any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.” In other words, there will be no tax if the advertising revenue is consumed in the operation of the business. For a paper teetering on the cusp of profitability, a tax on unrelated business income should be no deterrent to becoming not-for-profit.
So the only drawback apparent to readers—the folks who will ultimately determine whether the newspaper will survive—would be the absence of political endorsements at election time. This isn’t critical, especially as it’s clear that the paper may still publish new stories, commentary and opinion on any issue that might be part of a political campaign.

If struggling newspapers, to avoid extinction, want to convert to not-for-profit form and seek tax exemption that would enable them to solicit tax-deductible contributions, the door is open at the Internal Revenue Service.

Without much public awareness, the IRS for many years has approved tax-exemption applications from not-for-profits that gather and disseminate news or other worthwhile information, even on narrow subjects. Section 501(c)(3) of the Internal Revenue Code authorizes tax exemption for organizations operated exclusively for educational purposes, among others. The section stipulates that no shareholder or other person may benefit financially from such an organization’s operations, that propaganda and lobbying may not constitute any substantial part of its activities, and that it may not endorse or oppose political candidates.

In its many favorable rulings under the “educational” provision the IRS has typically insisted on public support as well as dissemination of information.

As far back as the 1960s and ’70s the IRS granted tax exemption to not-for-profits, some of them advocating a position on public issues, that

educated the public about the quality of radio and television programs,

encouraged research on and published information about physical and mental disorders,

gathered and published information intended to lessen racial and religious prejudice in housing and public accommodations,

promoted equal rights for women by investigating employment discrimination and publishing recommendations to employers, and

investigated citizen complaints about local newspaper coverage and published its findings.

In this last ruling, in 1974, the IRS declared: “It has been historically recognized that the conduct of factual inquiries on subjects of benefit to the public and the dissemination of the information so developed is educational in the charitable sense.”

The decline of newspapers threatens the quality of our civic life, our sense of community. Unfortunately, there’s no sign that the long-term erosion of newspaper advertising revenues can be reversed.

Despite the advent of web-based news, newspapers are worth saving. One obvious reason is that they are the source of much online news. They also tie our communities and our nation together in a way that online news services have not achieved. They offer cohesion rather than fragmentation.

One way to preserve newspapers is to develop new sources of revenues: tax-deductible public contributions, membership fees, corporate sponsorships and foundation grants. The model has been well tested, by public broadcasting stations. It works.

Newspapers can convert to not-for-profit form (not much of a give-up for shareholders getting no return anyway) and apply to the Internal Revenue Service for tax-exempt status enabling them to solicit tax-deductible contributions. Becoming tax-exempt would not foreclose selling advertising or taking positions on public issues. For many years the IRS has been receptive to tax-exemption applications from not-for-profit organizations that gather and disseminate news.